Some acquaintances have a daughter enrolling in an expensive Ivy League school and are considering paying the full 4 years tuition now at the current tuition vs. paying every year when the tuition may go up each year. They do have the money, but I suspects there are reasons to not pay the full amount? Thoughts and/or experiences?

Some acquaintances have a daughter enrolling in an expensive Ivy League school and are considering paying the full 4 years tuition now at the current tuition vs. paying every year when the tuition may go up each year. They do have the money, but I suspects there are reasons to not pay the full amount? Thoughts and/or experiences?

If Daughter doesn't finish (or transfers), do they get the full dollar amount back for unattended quarters/semesters/etc.?
And if so, at the initial paid rate, or any interest?
Main concern would be just to get the full prorated amount back (but not prorated for partial semester or such).

And does this cost them extra in terms of tax, to make that cash available in one lump sum?

Assuming there's no chance of them getting financial aid at any point and unused funds can be recovered if she drops out then looks like a clear cut decision to me.

Tuition has been going up quite steadily at the Ivy that I work at (at least 3% per year) and the university here has given no indication that it intends to slow that down or freeze and I haven't heard that about other places. The prevailing philosophy seems to be that because of the endowment even those paying the full tuition are subsidized and that the affluent should continue to pay a similar share of the costs.

As anyone who has read my posts about education can guess, I consider DS's Ivy tuition one of the clear-cut great investments, even as a full pay. It would have been even better at a flat price for 4 years. The fact that our portfolio did well during those years doesn't negate that it would have been a good strategy.

Some acquaintances have a daughter enrolling in an expensive Ivy League school and are considering paying the full 4 years tuition now at the current tuition vs. paying every year when the tuition may go up each year. They do have the money, but I suspects there are reasons to not pay the full amount? Thoughts and/or experiences?

Assuming there is a very good chance the daughter will complete her schooling I think this is a good idea. When I was in college several years ago (didn't attend an Ivy League school) it seemed like tuition went up every year. Hopefully they can charge the tuition on a cashback credit card and rake in a lot of rewards!

One potential drawback that hasn't been mentioned yet is the tax implications. If they pay all the tuition in one year, they won't be able to take the tuition deduction for years 2-4. In all likelihood though, the savings in tuition will probably outweigh the savings in tax deductions.

My son graduated last December (a semester early) from a full-cost-to-me Ivy. And I did exactly that...I prepaid. I figured that the 2=5% annual tuition increases saved was a better risk free return than I could get elsewhere on that short term money. In the end, my son was able to graduate a semester early and they gave me back the prepaid amount without any problem. OK, so they had my money for about 3 years with zero interest. I was so glad to save a semester's tuition that I'm OK with them having the use of that money for 3 years I guess. If I had to do it again I would.

I did this successfully and I think it was well worth it. I got tuition inflation after-tax (~3-4% per year) on money that would have otherwise been in cash or short-term bonds.

A couple of key caveats. The money can't come from a 529 because only the expenses in the year of the payment will be qualified.

My child had an illness and took a semester off. We got refunded a semester, but the rest of it stayed on account. Also, she only needed 7 credits her last semester, and we got refunded the difference between the full-price part-time per-credit cost for her last semester, and the payment we had on file which was that of her first semester.

A couple of key caveats. The money can't come from a 529 because only the expenses in the year of the payment will be qualified.

Technically this is correct but there is a workaround if you have "extra money". And the workaround is that you use your own money to do the prepay, then withdraw from the 529 each semester and repay yourself for that semester. I had the PA TAP Guaranteed Savings Plan, which is essentially a prepaid 529 pegged to the somewhat soaring cost of Penn State. So the 529 went up although junior's cost was actually "locked in" as I had prepaid it. The bottom line is that the savings ends up in the 529 plan, which I think is better than in the college's coffers.

A couple of key caveats. The money can't come from a 529 because only the expenses in the year of the payment will be qualified.

Technically this is correct but there is a workaround if you have "extra money". And the workaround is that you use your own money to do the prepay, then withdraw from the 529 each semester and repay yourself for that semester. I had the PA TAP Guaranteed Savings Plan, which is essentially a prepaid 529 pegged to the somewhat soaring cost of Penn State. So the 529 went up although junior's cost was actually "locked in" as I had prepaid it. The bottom line is that the savings ends up in the 529 plan, which I think is better than in the college's coffers.

I had thought about doing this, but a) I would have otherwise invested the money in cash because it needed to be safe and b) I couldn't be sure how the school would report on the 1098-T, c) I wasn't confident when the IRS would rule I had paid the tuition - during the semester it was already billed, or when I prepaid all 4 years. I didn't want to risk IRS scrutiny.

In other words, it wasn't clear to me if I was prepaying 4 years of tuition, or if I was depositing money in the colleges account to be paid before each semester. It turns out the college reported the tuition paid before each semester so I suspect what you propose would work fine.

We just did the pre-payment for 4 years at Harvard last week (the deadline just passed).

Even though it is very much against our nature to do such things --we are 100% stock investors, and are very fortunate to have sufficient reserve to weather the blackest of swans, it still felt unexpectedly good to "knock it out"

-Even though the "savings" of 3-4% per year likely won't
match what we could have earned by paying annually, and keeping the balance invested.

Plus, if it is money your friends need to keep
" safe" it makes even more sense to pre-pay

Since many students do a semester abroad, would that semester already be covered tuition-wise?

What if the student changes his/her major and takes more than 4 years? (However, most private universities are pretty good about getting them graduated within 4 years since scholarships rarely cover longer than that and parents would be irritated.)

A couple of key caveats. The money can't come from a 529 because only the expenses in the year of the payment will be qualified.

I actually did this, and paid the lump sum with 529 money. 2 years later I got a letter from the IRS. My accountant sent a letter explaining the situation along with a copy of the contract. It appears to have satisfied them.

Since many students do a semester abroad, would that semester already be covered tuition-wise?

What if the student changes his/her major and takes more than 4 years? (However, most private universities are pretty good about getting them graduated within 4 years since scholarships rarely cover longer than that and parents would be irritated.)

Harvard's program is essentially risk-free.
Any unused portion is refunded.

If an extra semester is required, it would require an extra payment at that time.

Offer is not open to students receiving need-based aid
from the school (the only kind they offer)

However, extra-mural merit scholarships still can be applied to room and board fees, which cannot be pre-paid.

A couple of key caveats. The money can't come from a 529 because only the expenses in the year of the payment will be qualified.

I actually did this, and paid the lump sum with 529 money. 2 years later I got a letter from the IRS. My accountant sent a letter explaining the situation along with a copy of the contract. It appears to have satisfied them.

I don't understand how you don't get a penalty. Can you elaborate on the excuse that your accountant used?

A couple of key caveats. The money can't come from a 529 because only the expenses in the year of the payment will be qualified.

I actually did this, and paid the lump sum with 529 money. 2 years later I got a letter from the IRS. My accountant sent a letter explaining the situation along with a copy of the contract. It appears to have satisfied them.

I don't understand how you don't get a penalty. Can you elaborate on the excuse that your accountant used?

He wrote a letter explaining the situation and sent a copy of the prepaid tuition contract. I don't recall that there was a special loophole here. He also sent an amended 1040 that included some capital losses that were missed. The IRS sent me a refund, so I assume they accepted this, but it has only been a year and a half, so maybe they will still come after me.

Another possibility is the Independent 529 plan. I understand the way it works is parents pay some or all of the expected costs now, and if a child later goes to any one of the 300 participating private schools, they get proportional credit based on the tuition at the time of contribution. On the other hand, if your child does not go to one of those schools (which include Stanford and MIT, but few or no Ivys), the funds can be used for another school but with a 2% cap on the return. I believe the funds have to be on deposit for some period of time before they can be used.